Meet bitcoin, 2013's biggest winner

Adding 6200 percent, bitcoin was the biggest economic winner of 2013. However, a lot remains unclear about how the virtual currency works and is created. RT spoke to Robin Tiegland from the Stockholm School of Economics to shed a little light.

RT: Can you explain in layman’s terms how Bitcoin is ‘mined’?

-Bitcoin mining is the process of using
computer power to process Bitcoin transactions, secure the
Bitcoin network, and ensure that the decentralized Bitcoin system
is synchronized. When a person mines Bitcoins, he/she uses
specialized Bitcoin software and hardware to perform certain
tasks to confirm Bitcoin transactions occurring in the network.
In return for conducting these tasks that make the Bitcoin
network a secure payment network, individuals or pools of
individuals are paid a fee, at the moment a block of 25
Bitcoins.

RT: Can an ordinary person without any technical knowledge create
bitcoin?

-You can, but it takes a long time now
because the algorithms are getting more and more difficult and
more and more processing power is needed. My doctoral student is
mining bitcoins. She is a clever person, but she doesn’t have a
high degree of technical skill or the experience of a programmer
or anything like that. So it is possible. And there is enough
help online for people to figure out how to do this. I think
there is a very good support group. So while you don’t need any
special technical knowledge, you should be very skilled in the
sense of knowing how to access knowledge on the internet as well
as interacting with online communities. People should be able to
do this.

The complexity of the algorithm depends on the number of
bitcoins. It is actually predetermined, and the amount of
bitcoins entering the system will never go higher than 21
million, which is to be reached in 2140. So the progression will
never go faster and the amount of time to crack the coin will
always stay the same.

RT: Who has set this limit of 21 million? Why did they say that
the number of bitcoins is limited?

-No one really knows who or why since no
one has ever really spoken to Satoshi Nakamoto, the pseudonym of
a person or a group of people behind bitcoin. When the original
code was written, this is what was written in the protocol: that
21 million will be the limit of the number of Bitcoins to be
released into the system, and it will be reached by 2140. I was
speaking the other day to some gurus of the global bitcoin
community, and they said it can never go faster because it will
always reset; it takes 8-10 minutes for a block chain to be
mined. Similar to gold, it has a limited amount; however,
different from gold, you can divide bitcoin to 8 or 10 decimal
points. But one day the bitcoin community potentially may say,
let’s increase the number of zeros that we actually can divide
the currency into.

RT: And what benefits do those who create bitcoins get? Why
should I want to create bitcoin?

-There are a number of reasons. You might
want to mine Bitcoin because of the challenge in doing so or
because of the reputation effect - it can be fun and cool,
cracking code and mining Bitcoins. Or you might want to be part
of a larger community either in your region or country or perhaps
part of the Bitcoin community that spans the globe. Then there is
also the possibility of making money through mining bitcoins, but
you’ll need about six months to recoup the money you need to
invest in the specific hardware. Finally, you might want to buy
things in bitcoins or you could view bitcoins merely as an
investment. But it is actually easier to exchange your dollars or
euros or any other currency into bitcoins through one of the
bitcoin exhanges.

RT: So the two processes are separate: people are interested in
creating crypto-currency and buying it?

-Yes, you could say that. There are a
number of people who have no technical competence nor interested
in mining bitcoins but who are buying bitcoins merely as an
investment.

RT: Why do you think Bitcoins have become so popular? Can a
crypto-currency become a viable alternative to conventional
currency?

-Yes, I think we are on our way to seeing
this. Bitcoin is actually only one of the 59 different
crypto-currencies at the moment, which have a market
capitalization of around $8.5 billion. So I think one of the
reasons Bitcoin has become so popular is the interest and
willingness of people to disconnect money from the government. In
the case of bitcoin, money is something not controlled by any
central authority or bank. You also have people who are very much
upset with the financial system, the banking system, because it
takes such high fees and can be seen as very inefficient now with
the internet. While with bitcoin you can send it to anyone,
anywhere in the world, even micropayments instantly. So I can
send a dollar to a programmer in Pakistan and it will only take a
couple of minutes, while a bank transfer will take a couple of
days and cost me $30-50 to send the money, more than the amount I
would like to send. There are also people who see bitcoin as a
speculative investment, agamble, looking for a profit. That might
be a bubble, I think it’s quite a bubble now at the rate of
$1,200 per bitcoin, but it is could also be an investment
opportunity if one buys at the right time.

RT: Can it be a real alternative to conventional money?

-Yes, I think it already is because people
are trading and making transactions every day all over the globe
– there are at least 60,000 Bitcoin transactions a day. I would
say some communities are using it as an alternative form of
payment. I know entrepreneurs who use it every day, they prefer
to trade, buy and sell services using Bitcoins. So when people
start using and trading with it, it’s already an alternative to
everyday money. I think it’s the beginning of many different
crypto-currencies we will see.

RT: What will happen to Bitcoin when it becomes regulated?

-I think it’s very difficult for bitcoin to
become completely regulated because it is so spread out over the
community across the world. You will have to get many of the
governments in the world to agree on how to regulate it. However,
the government of Thailand has declared bitcoin illegal, for
example, yet people are still conducting transactions with it
there.

On the one side, bitcoin is good because you can see all the
transactions ever made with bitcoin online. And if the government
tries to close down bitcoin or regulate it too hard, another
currency will take its place, another form, probably less
transparent. So you might drive things underground. So, I think,
that governments will instead see what they can do in terms of
tracking, in terms of legitimizing perhaps, some forms of
softening regulations but not regulating it from the perspective
of stopping it. Regulating from the perspective of making taxes
on it, paying capital gains, but not being regulated by other
financial instruments.